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November 8, 2010

Global Gold Standard Suggested as Gold Hits New Highs

World Bank president calls for floating currency system; suggests gold

In an opinion piece titled “The G20 must look beyond Bretton Woods II,” the World Bank leader and former U.S. Treasury official pointed out that with so much dissent among G20 members at the U.S. action in launching QE2, the next meeting in Seoul looks likely to be fraught with tension. This, he suggests, is a good reason to take another look at how currency is regarded and valued.

Pointing toward the G7 in the 1980s and the desire early on of the Reagan administration and James Baker to avoid congressional protectionism “like the one we see today,” he says that currency coordination is combined with the Uruguay Round, launching the WTO, and a push for free trade.

While the jury is still out on the end result of the 1980s actions, says Zoellick, “this package approach was significant for its combination of pro-growth reforms, open trade and exchange rate coordination.” And such cooperation, in addition to “parallel agendas of structural reforms,” is needed today, in a “Bretton Woods II” that would restrict destabilizing capital shifts from one economy to another.

One such step he suggests is the agreement of the G7 to forego currency intervention unless other nations agree. And another is the formation of a cooperative monetary system “that reflects emerging economic conditions.” This new system, he posits, “should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values.

Although textbooks may view gold as the old money, markets are using gold as an alternative money asset today.” Such a policy would echo the original Bretton Woods treaty, in which fixed but adjustable exchange rates were tied to the value of gold.

According to a Financial Times report, most policymakers and economists believed that a return to a gold standard could lead to “overly tight monetary policy with growth and unemployment taking the brunt of economic shocks.” Others believe that it’s a possibility worth considering, and Rep. Ron Paul, R-Texas, regards gold with favor—so much so that, according to The Hill, he’s spearheading a drive to audit the U.S. gold reserves at Ft. Knox and the Fed, lest the need should arise for a return to the gold standard. And in January Forbes ran an interview with Paul and Steve Forbes in which Paul said that gold as currency would make the Federal Reserve obsolete.

Reuters reported Monday morning that gold had hit a new high in Asia, in the wake of expectations of rising inflation after QE2. The precious metal hit a new record at $1,398.35 per ounce before dropping back a quarter of a percent. While a rise in gold usually signals a weak dollar, the currency was unexpectedly strong on Monday, rising against other currencies in the wake of stronger than expected U.S. jobs data on Friday. In other trading, the euro was down and the yield spread widened between Irish and German government bonds.